Atlantic Coal Digs Deep To Fund Expansion Plans

When the BlackRock UK Smaller Companies Fund started selling off its stake in AIM listed Atlantic Coal (LON:ATC) last summer, the company’s managing director Stephen Best was quick to respond. A meeting between the two sides led to a u-turn by the fund manager, which went on to double its stake in the US focused coal miner. For Best, the renewed vote of confidence was the prelude to a £12m fundraising that looks set to fund a shopping list far beyond the equipment he needs to expand the Atlantic’s current operations. For the straight-talking mining engineer, major expansion is on the agenda.

Atlantic joined AIM in October 2007 through the reverse takeover of cash shell Summit Resources. Its coal mining peers on the market range from Canadian giant Western Canadian Coal (LON:WTN) to Global Coal Management (LON:GCM) , UK miner Ath Resources (LON:ATH) and Australian focused companies Caledon Resources (LON:CDN) and Altona Resources (LON:ANR) . At the time of the listing, Best was looking to fund development work at the company’s Stockton Colliery, an opencast anthracite mining and processing operation in the Pennsylvania Coal Field. Since then, his team have been working to ramp up production and cut costs on the project, which currently boasts proven reserves of 4.2 million tons of coal, or approximately 2.1 million tons of high quality, high carbon, washed anthracite.

At the same time as driving Stockton towards profitability, Best has been keen to explore ways of expanding Atlantic’s ground holding. Earlier this year, the company aborted a move to buy US coal company Maple Carpenter Creek and a previous attempt on fellow AIM company Strategic Natural Resources (LON:SNRP) also fell through. However, with cash available from latest £12m fundraising, Best is this year prioritising his plans for expansion and is urging Atlantic shareholders to support the Placing at the company’s General Meeting next month.

Steve, you have a long history in the coal mining industry so how did that lead to the Pennsylvania Coal Field?

I started off as a junior engineer when I was 18 and I worked for a contractor who worked for the National Coal Board Opencast Executive. I became an engineer and then Resources Manager where my job was to identify potential opencast coal sites in coal bearing areas across the country, particularly in north-east England, Derbyshire and South Wales. When I was 23 I started my own company, GB Mining, and I sold that when I was 25. There was a recession in coal mining during the 1990s and in 2000 I went to north-east Pennsylvania, by invitation, and bought Coal Contractors 1981 Inc from its owners.

What was the attraction with that deal?

Well once you’ve been in coal mining it is a bit like a drug. North-east Pennsylvania is a very civilised part of the world where the law and order and property laws are very straightforward. We bought the company and it was on the last legs of its current site, the Gowen site, which we finished coaling and we are currently restoring, and then we opened the Stockton mine, which is about 20 miles away, shortly thereafter in 2006/7. I think the only bad luck we had was that originally we were three English investors thinking that we would just get project finance from an American bank, which you would in the UK, but we were woefully wrong in that assumption. So we did have a hard time in establishing the Stockton site. In 2007 we were ready to put a washing plant on in order for us to create more profit and that is when I bumped into Summit Resources, which was a cash shell. We did the reversal into that in November 2007, and from then it has been a public company.

Has the company’s AIM listing been an advantage to the company?

It’s different but I find it quite interesting. Obviously with being a public company there is a lot of transparency which enables it to be more speedy in attracting new investors. I am frustrated in some ways when I’m not allowed to say that we’re looking at this, that and the other – you can only explain what you’re actually physically doing now but we do have some serious expansion plans.

You have put a great deal of work into developing the Stockton project. What has that involved?

Having acquired it, we purchased six new 100-ton trucks and literally opened up the site from scratch – we paid for the site from the previous landowner and literally just started digging for coal. North-east Pennsylvania is a very old coalfield, it has been producing coal since the 1850s, and it is a legacy coalfield where you have third and fourth generation families who own coal reserves round there who aren’t really interested in the business. This is where there is a very good story for consolidation in that the elderly people who do control these sites see that there is an opportunity where, rightly or wrongly, these people from foreign lands are interested in expanding the business that they have got.

What are your production rates and how are you planning to increase them?

Well last calendar year, to 31st December, we did 100,000 tons of clean coal and we are hoping to get that to between 150,000 and 175,000 tons this year. Last May we took delivery of a Liebherr 9250 19-yard excavator and that has made a significant impact on overburden removal on the project. We do have some additional pieces of equipment that we would like to renew, which we are intending to do this year. We are fairly confident with those targets.

What opportunities are there in the region to expand from the Stockton base?

Our current resource base is 2 million tons, which doesn’t sound a lot but you have to remember that we are making about $45 a ton, compared to the bituminous coal where they are making $4 a ton, so you have that difference in ratio. As far as additional plays, we have sites identified. There are lots of opportunities for consolidation around there.

Can you tell me about the fundamentals of anthracite coal and the factors that are driving the market?

Anthracite is high carbon coal, 85% plus, and it is mainly used for its chemical qualities rather than heat generation. We produce seven sizes of coal and it is used mainly in the steel industry, filtration, glass manufacture and home heating at this time of year. It is currently being looked at as a substitute to coking coal due to the problems in Australia and the anticipated supply problems and production problems there. So it is used more as a catalyst to producing other things rather than just burning it to produce power.

The State uses it to heat prisons, hospitals and everything else. We export a small amount of coal, there is a lot of potential to export more coal but we don’t rely on that, we rely on our existing markets. We have a customer base of about 90 customers. We sell on spot prices so we get the best prices and we don’t have any problems in moving what we produce.

How stable is the coal price and how do cycles in the market affect you?

Anthracite is not as volatile or sensitive as other forms of coal, such as coking coal and bituminous coal, because there is only a certain supply and there’s only a certain demand, albeit a specialist demand. You get a spike in your prices in the winter months due to that home heating element, which is high margin stuff, and that will cool down in the spring and then you stockpile that element of production until the following September. So there is a bit of a cycle but apart from that it is level. Personally, I have seen prices rise from $48 a ton 10-15 years ago and we are currently achieving prices of up to $150 a ton.

Clearly it was a boost to get Black Rock doubling its stake in the group recently? How important is it to you to get institutional backing?

We went to see BlackRock because we were concerned that they were in there but they had started selling the stock, which was due to them getting a new manager. We went to see him and we showed him what the consolidation prospects were out there and he liked the story very much, he saw the logic and so he decided to maximise his stake. By exercising their options they are up to 9.5%, which is the maximum they are allowed to invest. We would like to see more institutional players but there is demand out there.

Why do you think that a private investor should take a closer look at the business now?

I think the important factors are that we are producing something that is in very short supply, it is a niche type of industry. We operate in a very politically safe environment, we are pegged to a good currency, which is the dollar, and you have a very good management team there which know the industry very well and we have got very few competitors. So if anybody wants a steady dividend player, which we will eventually be once we’ve got the shopping list down to where it should be regarding new plant and equipment, we will then turn into a dividend play.

Finally, what can we expect to see from the business over the course of the rest of the year?

Well hopefully you’ll see two things; more institutional investors, achieving our production targets and the big bonus is some significant additional resource acquisitions.

Thank you very much.

Any time, Ben.



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